Hate Budgeting? Read This

Where does your money go? It's hard to tell unless you have a system set up to track your inflows and outflows. But many people skip this critical financial housekeeping task because they're afraid -- afraid that they may have to rein in their spending, wincing at the thought of losing cable TV, tennis lessons, or that daily venti coffee with two pumps hazelnut, two pumps vanilla, two pumps caramel, and extra cream.

But budgeting doesn't have to mean keeping detailed records of every penny you ever spend for the rest of your life. In fact, it can take many forms -- a simple notebook or using a handy website -- and once you've done the setup it may only require a few hours once a year or so to tracking all your sources of income and all the ways you spent it.

By figuring out exactly how much money is going where, you can more clearly see where you can make some changes, and you can weigh your options against each other more rationally.

Your basic two-category budget
If you want to set up a budget spreadsheet, or even just start keeping track of your money management in a notebook, you'll need to list categories. Everyone's expenses and inflows are a bit different -- for example, some consider Internet bills to be an entertainment expense, while others consider them a work expense. Here are some key categories to consider as you set up your list:

Inflows:

  • Salary/main job income
  • Dividend income
  • Income from side jobs
  • Proceeds from sales
  • Capital gains reaped from investments

Outflows:

  • Rent or mortgage
  • Groceries and household necessities (toilet paper, detergent, etc.)
  • Eating out
  • Utilities (water, gas, electricity, garbage, sewer, etc.)
  • Transportation (car, maintenance, repairs, gas, public transportation costs, parking, etc.)
  • Taxes (property, income, etc.)
  • Telephone and communication
  • Debt repayments
  • Travel (airfare, hotels, etc.)
  • Clothing
  • Savings
  • Insurance (home, health, car, disability, life, etc.)
  • Entertainment and recreation (cable TV, Internet, season tickets, etc.)
  • Medical and health (doctor visits, glasses, gym memberships, etc.)
  • Charitable donations
  • Education
  • Child-related expenses
  • Pet care
  • Miscellany
If all of these categories make you break out in hives, then simplify. Pare down the number of spending categories to best reflect your lifestyle. For example, bundle groceries and eating out under a larger category labeled "Food." Or if there's a particular area of spending you're curious about -- say, the amount you spend going to baseball games, and buying equipment to play in your local league, create a "Baseball" category.
The more specific you can be, the more useful the whole exercise will be for you. But it's only useful if it's not so overwhelming that you don't end up doing it.

The hard part is done
Once you've set up your list of inflows and outflows, all that's left to do is to plug your real-world dollar amounts into the right category. You can do it daily, weekly, or whatever works best for you. Find convenient ways to log different sorts of transactions. For example:

  • If you put most of your expenses on a credit card (which you pay off every month, right?) then you can wait until the monthly bill arrives.
  • If you have bills auto-paid from your bank account, check in a few times a month to grab the data.
  • If much of your spending is with cash, keep a small notebook with you and jot down what you spend when you pull out your wallet.

After a while -- a month or, ideally, three of tracking where your dollars go -- you'll have all the information you'll need to make some potentially life-changing financial decisions.

For example, your efforts might reveal that a $4 coffee every weekday is costing you about $1,000 per year and that your weekly $40 tennis lesson costs $2,080 annually. That pack-a-day smoking habit, when cigarettes cost $6 per pack, will cost you nearly $2,200 per year. And an extra $40 on your cable bill for lots of premium and movie channels? $480.

When you see these numbers, you might realize that you can live with your basic cable channels and that quitting smoking can allow you to keep your tennis lessons. Cut out all these items, though, and you can save more than $5,500 -- which will add up to almost $30,000 in just five years.

See what tracking your spending can do?

You don't have to spend the rest of your life budgeting, but spending a little time on it for a limited period can greatly improve your financial future.

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